Friday, September 27, 2013

Three Years Late in the Race to the Courthouse

The court of appeal holds that the superior court did not err by confirming an arbitral award, even though the defendant had filed a parallel petition to vacate the award in federal court. Because the superior court had obtained jurisdiction over the subject matter of the action years before the federal case was filed, it did not abuse its discretion in refusing to stay in favor of the federal case.Shortly before plaintiff’s bad faith case against its insurer was to go to trial, the parties stipulated to complete the resolution of their dispute in a JAMS arbitration. The arbitrator awarded plaintiff almost $3.7 million, including a punitive damages award that was fifteen times the compensatory award. The parties returned to superior court, where the plaintiff expressed that it was going to file a motion to confirm the award. But before that could happen, defendant ran into federal court and filed a motion to vacate on the grounds that the arbitrator had disregarded the law in the computation of the damages. That was succeeded by a flurry of filings in superior court, including plaintiff’s motion to confirm and defendant’s corresponding motion to vacate, along with a motion to stay the state court case pending the federal motion to vacate.

The superior court denied the motions to vacate and stay and granted the motion to confirm and entered judgment for the plaintiff, which the defendant appealed in this case. At roughly the same time, the federal court issued a tentative ruling indicating that it was inclined to partially grant the motion to vacate and to reduce the award by about $1 million. Plaintiff then sought reconsideration of the federal order, noting that the superior court’s subsequent confirmation of the award and entry of judgment justified the district court to abstain on Colorado River grounds. The district court reversed course, decided to abstain, and defendant appealed to the Ninth Circuit. On appeal of the state case, defendant argued that (1) the superior court should have stayed, pending the federal litigation, and (2) it otherwise erred in confirming the award and denying the motion to vacate.

On the first point, the defendant argued that, because the arbitration involved interstate commerce, the FAA applied, and the superior court should have deferred to the federal court’s application of the somewhat broader “manifest disregard of law” standard that federal courts have read into section 10 of the FAA. In reviewing the stay, the court of appeal applied the three-element test in Simmons v. Superior Court, 96 Cal. App. 2d 119 (1950) and Caiafa Prof. Law Corp. v. State Farm Fire & Cas. Co., 15 Cal. App. 4th 800, 804 (1993), and held that because the superior court had acquired subject matter jurisdiction of the case almost three years before the federal case was filed, the superior court did not abuse its discretion by declining to stay.

Turning to the decision to confirm the award, the defendant argued that the FAA applied, such that the “manifest disregard” standard—which California Courts have not read into the California Arbitration Act—required vacation of the award. Reviewing prior decisions, the court determined that the substantive parts of the FAA applied, even in state court, provided the underlying dispute implicates interstate commerce. Thus, for instance, the FAA would govern questions of substantive arbitrability. But the procedural rules of the FAA do not apply in state court unless the parties’ arbitration contract expressly chooses them. Because the rules regarding confirmation or vacation of an arbitral award are procedural, the CAA standards would govern.

Under those standards, the award would stand. The defendant did not dispute that the kinds of damages awarded by the arbitration were recoverable—it just disputed the methodology used to come up with the amounts. But the JAMS’ rules that the parties adopted permitted the arbitrator to grant any remedy or relief that is just and equitable and within the scope of the parties’ agreement. It was thus within the arbitrator’s authority to calculate the award as he saw fit. If the parties wanted to require the arbitrator to comply strictly with California damages law, and to have his award reviewed for errors of law, their agreement should have said so. Further, the fact that the arbitrator calculated fees differently than either party proposed in its briefing did not merit vacation for acting beyond his authority. Finally, the 15:1 ratio the arbitrator applied in making his punitive damages award was, at most, an error in law, that was not reviewable on a motion to vacate unless the parties’ agreement permits vacation on that grounds. Nor would the court review the punitive damages award under constitutional due process standards because the state court’s act of confirming the award is not sufficient state action to make the entire private arbitral process subject constitutional due process.